ASi" kUCTURE FlOR DEVELOPMENT

Box 3.6 Telecom piivatizati6ci the case of Venezuela
When Venezuela privati2ed its stte-owned telephone were granted a limited monopoly on basic service (six
company (CANTV) in DEcember 1991; it had 1.6 nMlion years in Mexico; seven veers extendable to ten in Arlilies
in service (82 lines per 100 people as compared gentina).
with 35 lines per 100 people inKorea. An eight-year wait In Venezuela the process culminated with the sucfora
new telephone was common, and completion rates cessful public tender sale of a 40 percent share (but with
for international calls were less than 20 perent
majority voting control) to an internatioral operating
The government sought to expand and improve basic consortium for $1.9 billionL Pending passage of a new
service rapidly by tuni-ng the company over to i private telecom law, the government enacted a series of decrees
operator- with first-class international experience. Al- that established the mrgulatory agency, CONATEL, and
though it recognized the need to increase local rates sub- defined the regulations for the various types of service.
stantially, the goverinment was concerned with the po- Until the new law is passed, rate increases must be ratitential
political fallout from 4 rate shock:" Consequently, fled by the govemment
it decided to phase the rate rebalandng over nine years. In the two years following privatization, CANTV in-
During this period the newv operator was granted an ex- vested more than $1.1 billion and installed 850,000 new
dusive franichise for local, long distance, and interna- and. replacement lines, far exceeding its obligations
tional service The profits from international service under the concession contract. Virtually all service imwould
be used to cross-subsidize lcal service and fi- provement targets were meL
nance the desired network expansion. The concession Several Iessons have emnerged from the Venezuelan
contract included annual obligations to expand and im- experienmc Even without a fully defined legislative
prove basic service (induding the insallation of 3.6 mil- framework, telecom privatization can provide immedilion
additional lines over nine years) and a cap on the in- ate benefits f orn increased investment Although some
crease in prices for basic telephone services. All other rebalancing of tariff lias occmrd, sustained tariff inservices
were open to competition-including celular creases will be needed. With rapidly changing techuolservice,
private lines, information services, and equip- ogy, monopoly rights granted to maintain cross-subsimernt
This model resembled telecom privatizations in dies and to promote service expansion will prove
Mexico and Argentina, where the privatized operators increasingly difficult to define and enforce.|
During this process, new laws and administrative utilities through continued shareholding or ftirough
procedures have also been put in place (Box 3.7). "golden shares" that give the government veto
Although regulation through individual con- rights, especially on matters reladng to the social
tracts has attracted new investment to the power obligation of the utilities (Box 3.8).
sector, further development will require sectoral
rules to ensure fair competition. As in most devel- Dealing with regulalory hiperfections
oping countries, new generating capacity has been Regulation must negotiate many potential pitfalls:
developed without well-agreed principles on inter- as it controls the exercise of monopoly power, it
connection and-dispatch among providers. This ab- must also ensure service quality, safety, environsence
has not been a problem so far, partly because mental protection, service obligations, and the
private supply was filling large demand gaps. As rnghts to network access (Figure 3.1). The weight of
the gaps close, however, the various suppliers will each of these objectives varies with industry struccome
doser to being competing sources of power, ture, which evolves over time. Flexibility must
and the regulatory authority wfll have to define therefore be balanced with commitment to fixed
clear rules for determining whose power is bought rules. Too much flexibility lets well-organized interand
on what terms-
est groups gain control of the regulatory process, to
their own benefit Too rigid a regulatory structure
MALAYSIA. Malaysia's approach puts it some- limits the ability to correct mistakes and adapt to
where between that of Argentina and the Philip- change. It can also stifle initiative. Regulation sonepines.
Utilities have been gradually privatized, and times leads to outcomes worse than those that imnew
entry has been allowed in electric power and perfect markets could achieve.
waten Statutory regulatory efforts have lagged, and Experience argues for keeping regulation to a
discipline on operations is imposed through con- miriimum. Three considerations influence the regutractual
agreements. The government also has latory. task that accompanies the introduction ofprimaintained
direct regulatory supervision of large vate sector involvement
66